You're running payroll and one of your staff asks why her tax went up this cutoff. She worked overtime last period, and now the withholding looks different. You open the BIR tax table, stare at the brackets, and realize you're not sure whether to annualize first or apply the rate directly. The numbers need to be right before payday, and payday is tomorrow.

Withholding tax is the most calculation-heavy part of Philippine payroll. The brackets are progressive, the computation involves annualization, and the amount shifts when overtime or holiday pay changes someone's income for the period. Here's how to get it right.

The TRAIN Law brackets

The current income tax rates come from the TRAIN Law (Republic Act No. 10963), which took full effect in 2023. These brackets apply for 2026:

Taxable Income (Annual)	Tax Rate
₱250,000 and below	0%
Over ₱250,000 to ₱400,000	15% of excess over ₱250,000
Over ₱400,000 to ₱800,000	₱22,500 + 20% of excess over ₱400,000
Over ₱800,000 to ₱2,000,000	₱102,500 + 25% of excess over ₱800,000
Over ₱2,000,000 to ₱8,000,000	₱402,500 + 30% of excess over ₱2,000,000
Over ₱8,000,000	₱2,202,500 + 35% of excess over ₱8,000,000

The first ₱250,000 of annual taxable income is completely tax-free. For many minimum-wage team members, this means zero withholding tax.

How taxable income is computed

Taxable income is not the same as gross pay. Before applying the tax table, you subtract mandatory contributions:

Taxable income = Gross compensation - SSS - PhilHealth - Pag-IBIG

This order matters. A common mistake is computing tax on gross pay without deducting contributions first, which results in over-withholding every single cutoff.

Step-by-step computation

Most Philippine businesses pay semi-monthly (24 pay periods per year). Here's the process for each cutoff:

Determine gross compensation for the pay period.
Subtract the mandatory contributions (SSS, PhilHealth, Pag-IBIG employee shares).
The result is taxable income for the period.
Annualize the taxable income (multiply by 24 for semi-monthly).
Apply the correct bracket to get the annual tax.
De-annualize (divide by 24) to get the withholding for the pay period.

Worked example

Carlo earns ₱25,000 per semi-monthly cutoff (₱50,000/month gross).

His mandatory contributions per cutoff:

SSS: ₱1,125
PhilHealth: ₱500
Pag-IBIG: ₱200
Total deductions: ₱1,825

Taxable income per cutoff: ₱25,000 - ₱1,825 = ₱23,175

Annualized taxable income: ₱23,175 x 24 = ₱556,200

This falls in the "Over ₱400,000 to ₱800,000" bracket:

Tax = ₱22,500 + 20% of (₱556,200 - ₱400,000) Tax = ₱22,500 + 20% of ₱156,200 Tax = ₱22,500 + ₱31,240 Annual tax = ₱53,740

Per cutoff: ₱53,740 / 24 = ₱2,239.17

Carlo's withholding tax is ₱2,239.17 per semi-monthly pay period.

The ₱250,000 threshold

Under the TRAIN Law, team members whose annual taxable income is ₱250,000 or less pay zero income tax. That works out to roughly ₱10,417 in taxable income per semi-monthly cutoff.

For many minimum-wage workers, this means no withholding at all. But you still need to run the computation each period because overtime pay, holiday premiums, or bonuses can push the annualized amount above the threshold.

Common mistakes

Not deducting contributions first. SSS, PhilHealth, and Pag-IBIG must be subtracted before applying the tax table. Computing tax on gross pay inflates every team member's withholding.

Misunderstanding progressive brackets. Each bracket only applies to the income within that range, not the entire amount. Someone earning ₱556,200 annually doesn't pay 20% on all of it. They pay 0% on the first ₱250,000, 15% on the next ₱150,000, and 20% on the remaining ₱156,200.

Applying a flat rate. Some owners apply a single percentage to everyone regardless of income level. This undertaxes higher earners and overtaxes lower earners, and it creates problems at year-end reconciliation with the BIR.

Ignoring mid-year changes. A raise, significant overtime, or a bonus can shift someone into a higher bracket. The withholding should adjust to reflect the new projected annual income, not stay fixed at the rate from January.

Timekeep payslip showing withholding tax computation

How Timekeep handles withholding tax

Timekeep computes BIR withholding tax automatically each pay period. It deducts SSS, PhilHealth, and Pag-IBIG first, annualizes the taxable income, applies the correct progressive bracket, and shows the result on the payslip. When a team member's compensation changes due to overtime or a raise, the computation adjusts for that period.

One less thing to compute at midnight

That staff member wondering why her tax changed? With the right system, the answer is on her payslip: overtime pushed her annualized income into the next bracket. Clear, accurate, and ready before payday.

Try it free for 30 days at timekeep.ph. No credit card required.